How each one makes you money
A bond is a loan. You pay, for example, ₹10,000; the issuer pays a fixed coupon (say 7.2% a year) and returns ₹10,000 at maturity. If interest rates in the economy rise after you buy, newer bonds pay more, so your bond's market price falls — but if you hold to maturity and the issuer pays, you still get the promised cash flows.
A debt mutual fund holds many bonds and money-market instruments. Its NAV moves daily with interest rates and credit events. There is no fixed maturity (except target-maturity funds), so your return depends on the portfolio yield, the fund's duration, and costs. An equity mutual fund is a different asset altogether — it owns shares and aims for long-term growth with much higher volatility.
Types you will come across
Mutual fund options
- Overnight & liquid funds — parking money for days to months
- Short-duration & corporate bond funds — 1–3 year goals
- Gilt funds — government securities, higher rate sensitivity
- Target-maturity funds — hold bonds until a fixed year, bond-like predictability
- Hybrid & equity funds — for growth over 5+ years
Bond options
- Government securities (G-Secs), T-Bills and SDLs via RBI Retail Direct
- RBI Floating Rate Savings Bonds — rate resets every six months
- Listed corporate bonds and NCDs via SEBI-registered online bond platforms
- Tax-free PSU bonds — mainly available in the secondary market
How they are taxed (FY 2026-27)
- Debt mutual funds (less than 35% equity, bought from April 1, 2023): gains taxed at your income-tax slab, whatever the holding period — but only when you redeem.
- Equity mutual funds: long-term gains (held over 12 months) above ₹1.25 lakh a year taxed at 12.5%; short-term gains at 20%.
- Bond interest: added to income and taxed at your slab every year it is paid.
- Selling a listed bond before maturity: gains after 12 months are generally taxed at 12.5%; within 12 months at slab rate.
Why tax timing matters: at the same slab rate, a debt fund lets the full amount keep compounding until you withdraw, while a bond or FD is taxed every year. Over 10–20 years that deferral can make a visible difference to the final amount.
Tax rules change with each Budget. Confirm your situation with a qualified tax professional before investing.
Risks to understand before you invest
Interest-rate risk
When rates rise, bond prices and debt fund NAVs fall. Longer duration means bigger swings.
Credit (default) risk
A company may delay or skip payments. Ratings help but can be downgraded quickly.
Liquidity risk
Some bonds rarely trade, so selling early can mean a discount.
Reinvestment risk
Coupons and maturing money may have to be reinvested at lower future rates.
Which suits your goal?
- Emergency fund: liquid or overnight funds, or a bank sweep account.
- Goal in 1–3 years: short-duration or corporate bond funds, or high-quality bonds maturing near the goal date.
- Known future expense (e.g. fees in 2030): a G-Sec or target-maturity fund that matures around that year.
- Wealth creation over 7+ years: equity mutual funds via SIP, balanced with some debt.
Red flag: bonds offering far higher yields than similar-rated peers usually carry more risk. Always check the rating, whether the bond is secured, and the issuer's financials.